08 September 2014

IFRS Foundation's Staff offer views on IAS Regulation in the EU and IFRS

The purpose of the Foundation's Staff Paper was to contribute to the debate on the adoption of IFRS and to offer views on whether it has improved the efficiency of EU capital markets by increased transparency and comparability of financial statements.

In 2012, the Foundation commissioned Ann Tarca, Professor of Accounting at the University of Western Australia and a former Academic Fellow of the IASB, to examine and summarise current academic research on IFRS. In summary, the research finds that capital markets benefit after adopting IFRS, even in countries with strong investor protection and high quality financial reporting and enforcement. Such benefits include:

(a) market efficiency—market liquidity increases following the introduction of IFRS, while firms benefit from a reduction in the cost of capital and an increase in equity value;

(b) investment decisions—analysts that review IFRS firms have more accurate forecasts compared to those forecasts of analysts following non-IFRS firms. Furthermore, when a country’s GAAP is closer to international standards, foreign analysts are more likely to follow and provide more accurate forecasts for firms in that country;

(c) quality of financial information—in Europe, there was a general perception among preparers, auditors, investors and enforcers that the application of IFRS has improved the comparability, quality and transparency of financial reporting;

(d) foreign investment—IFRS is a vehicle through which countries can improve investor protection and make their capital markets more accessible to foreign investors;

(e) capital market integration—higher correlations of market indices were observed between markets in which firms use IFRS and markets in which firms generally do not use IFRS;

(f) method of application—the success of common standards depends not just on the quality of the Standards issued by the IASB. Critically, success also requires an infrastructure to support IFRS to be in place at a national and international level.

The use of IFRS globally by EU companies, without the need for restatement, has provided them with the benefit of achieving improved group reporting and administrative savings through having to only report under one accounting framework.

The Maystadt report includes a comment that the stakeholders interviewed noted that IFRS has improved the quality, comparability and reliability of financial information. In addition, the IFRS Foundation staff also observe that ESMA produces annual reports on the Activities of the IFRS Enforcers in Europe. These reports have commented on the continued improvements in the quality of IFRS financial statements as a result of the significant experience gained by preparers since 2005.

That said, the IFRS Foundation staff acknowledge that the ESMA activity reports also comment that there is room for improvement in the quality of financial reporting in certain areas.

Staff paper

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